Breaking News
0
Ad-Free Version. Subscribe now to follow markets, faster and distraction-free. More details

Don't Count On Interest Rates Rising Anytime Soon

By Michael KramerBondsApr 03, 2020 09:36
ng.investing.com/analysis/dont-count-on-interest-rates-rising-anytime-soon-29333
Don't Count On Interest Rates Rising Anytime Soon
By Michael Kramer   |  Apr 03, 2020 09:36
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

This post was written exclusively for Investing.com

Yields are likely to remain low for the foreseeable future as the velocity of MZM Money Stock falls to its lowest level in modern times. The inflation gauge is likely to drop even further as economic growth in the U.S. slows, money printing ramps up and GDP shrinks.

The U.S. economy appears to have taken a severe turn for the worst, based on some of the regional data on business activity reported by Federal Reserve banks, such as New York, Philadelphia, Kansas City, and Dallas. The readings, in most cases, have been about the same as or worse than levels in 2008 and 2009. It could suggest that the economy has started to declines very quickly.

The quick downturn in the economy has resulted in the Federal Reserve launching massive quantitative easing measures and cutting the Federal Funds rate to 0. Additionally, Congress passed a $2 trillion relief bill to help bridge the gap as the economy shuts down due to the coronavirus outbreak.

Velocity of MZM Money Stock
Velocity of MZM Money Stock

Velocity Slows

The velocity of MZM fell to about 1.28 in the fourth quarter of 2019, as the growth of the MZM Money supply outpaced GDP. By the end of the fourth quarter, the MZM Money supply had reached $17.6 trillion, while the U.S. nominal GDP climbed to $21.7 trillion. It resulted in the velocity falling to its lowest level since the late 1950s. In a time where the creation of money seems to be happening quickly, and the GDP is likely to contract, it appears logical to conclude that the velocity of MZM will likely continue to drop, slowing the pace of inflation and keeping a lid on interest rates.

Economic Downturn

It’s hard to deny that the economy is slowing materially; the only question is by how much it is slowing, and how long it will last. Data from the New York Fed showed that the Empire State Manufacturing Survey business activity declined to its lowest levels since the 2008-2009 recession. Meanwhile, the Kansas City Fed’s Manufacturing Activity declined to its lowest levels since 2009 as well.

U.S. NY Empire State Manufacturing Index
U.S. NY Empire State Manufacturing Index

(U.S. NY Empire State Manufacturing Index)

Job data has also been weakening in the U.S. with the ADP employment report noting through March 12 there had been job losses of about 27,000. That number could have been much worse, had it not been for a significant influx of hiring for health care workers, which increased by 48,000. Initial jobless claims also increased to around 6.6 million on April 2 and are likely to continue to rise in the weeks ahead as more people file for unemployment insurance.

Strong Correlation

The declining economic activity is likely to result in a significant decline in the GDP. On April 2, the congressional budget office noted that the second-quarter GDP would decline by more than 7% while unemployment rises beyond 10%. Should the economy contract as the data is beginning to suggest, that will put downward pressure on the Velocity of MZM, and in turn, help to keep Treasury rates low. A chart of the velocity of MZM and the 10-Year Treasury shows how closely correlated the two are over a long period.

MZM/10-Year Treasury Chart
MZM/10-Year Treasury Chart

As the outlook for the U.S. economy declines and the Fed and Congress embark on policies to support the economy. The velocity of MZM appears it only may continue to head lower, and that rates will only follow.

Don't Count On Interest Rates Rising Anytime Soon
 
Don't Count On Interest Rates Rising Anytime Soon

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email